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In the 2000s, the African economy finally began to stir. Africa is today the world’s third-fastest growing region, and its collective GDP is equal to Brazil’s and Russia’s. Africans spend nearly $900 billion on goods and services—far more than Indians do. Pent-up consumer demand on the continent is enormous, and so are the opportunities: Consider that telecom companies have added 316 million subscribers—more than the U.S. population—in Africa since 2000.

Yet because of political instability and poverty, many companies have reservations about Africa. To help managers assess whether growth will continue there—and if so, where—McKinsey conducted an economic analysis of the continent and studied its consumer markets. The conclusion: Companies can no longer ignore Africa. But they need to manage risks, develop innovative strategies to deal with gaps in infrastructure and training, and recognize that it isn’t one market. There are four main types of economies: diversified, oil exporting, transition, and pretransition. Each presents a different set of opportunities and challenges, and executives must develop their strategies accordingly.

A year ago, when South Africa hosted the World Cup of football, a Tswanian phrase, Ke Nako (“It’s Time”), reverberated across the world like the cacophony of a million vuvuzelas, announcing that Africa’s moment had come. Economists, consultants, and executives all suggested that the African economy, which had languished during the last two decades of the 20th century, was finally stirring.

Nevertheless, most companies have been slow to enter Africa. Many assumed that the flutter of attention was the reflection of a global boom in commodity prices, and therefore of relevance primarily to oil and mining companies. The recent political turmoil in such countries as Algeria, Egypt, Libya, Morocco, and Tunisia and the civil war in Ivory Coast have dramatically reminded executives of the enormous uncertainty that businesses must cope with in Africa. With prodemocracy movements breaking out in some of Africa’s fastest-growing economies, multinational companies face a double bind: Some of the most promising countries present the highest risks.

That’s not all. In Africa the infrastructure is still poor; talent is scarce; and poverty, famine, and disease afflict many nations. Most Western executives, unsure of the size of Africa’s consumer markets, prefer to invest in Asia’s dragon and tiger economies rather than in Africa’s economic lions. “Is it truly Africa’s time?” they wonder.

So often were we asked the question that last year McKinsey & Company decided to analyze Africa’s economies and conduct a microlevel study of its consumer markets. Our goal was to identify Africa’s sources of growth, determine if it would continue over time, and size opportunities in key sectors. (For the full analysis, see Lions on the Move: The Progress and Potential of African Economies at www.mckinsey.com/mgi.)

The findings surprised us. Over the past decade, Africa’s real GDP grew by 4.7% a year, on average—twice the pace of its growth in the 1980s and 1990s. The surge cut across nations and sectors. By 2009, Africa’s collective GDP of $1.6 trillion was roughly equal to Brazil’s or Russia’s. The continent is among the fastest-expanding economic regions today. In fact, Africa and Asia (excluding Japan) were the only continents that grew during the recent global recession. Though Africa’s growth rate slowed to 2% in 2009, it bounced back to nearly 5% in 2010, and in 2011 it is likely to touch 5.2%.

While political troubles, wars, natural disasters, and poor policies could slow Africa down, the prospects for consumer-facing companies are bright. Africans spent $860 billion on goods and services in 2008—35% more than the $635 billion that Indians spent, and slightly more than the $821 billion of consumer expenditures in Russia. If Africa maintains its current growth trajectory, consumers will buy $1.4 trillion worth of goods and services in 2020, which will be a little less than India’s projected $1.7 trillion but more than Russia’s $960 billion.

In 2008, Africans spent $860 billion on goods and services—35% more than Indians spent.

As Africa’s economies progress, opportunities are opening in sectors such as retailing, telecommunications, banking, infrastructure-related industries, resource-related businesses, and all along the agricultural value chain. Consider that telecom companies in Africa have added 316 million subscribers—more than the entire U.S. population—since 2000. According to UN data, Africa offers a higher return on investment than any other emerging market. For several reasons: Competition is less intense and few foreign companies have a presence there, and pent-up consumer demand is strong. Companies that desire revenues and profits, we believe, can no longer ignore Africa.

Smart multinational companies are busy planting their stakes in the ground. Nokia and Coca-Cola have distribution networks in nearly every African country; Unilever has a presence in 20 African nations, Nestlé in 19, Standard Chartered Bank in 14, Barclays in 12, and Société Générale in 15. Homegrown giants are expanding: Ecobank and South African Breweries each operate in over 30 African countries, while MTN and Shoprite are in 16 African countries each. Companies that enter Africa now, we believe, can shape industry structures, segment markets, and establish brands.

The Growth Ahead

Busy executives may wonder whether the African economy’s recent growth is just a flash in the pan. After all, the economy had picked up during the 1970s oil boom, but when oil prices fell, it began to slow. In our opinion, Africa’s long-term prospects are strong, because both internal and external trends are propelling its growth.

To be sure, Africa is benefitting from the increases in commodity prices. Oil prices have shot up since 1999, when they were less than $20 a barrel, reaching more than $145 a barrel in 2008, and prices for minerals, grains, and other raw materials have also soared. Yet that trend explains only part of the African story. Natural resources directly accounted for just about a quarter (24%) of GDP growth from 2000 through 2008, according to our calculations. Other industries, such as wholesale and retail trade, transportation, telecommunications, and manufacturing, contributed the rest. In fact, countries that export commodities grew just a tad faster, at 5.4% a year, than nonexporters, which on average grew 4.6% from 2000 through 2008.

Three factors are responsible. One, several African countries, such as Angola and Mozambique, halted deadly hostilities, creating the political stability necessary for growth. The number of serious conflicts in Africa—those in which deaths exceed 1,000 people a year—declined from an average of 4.8 a year in the 1990s to 2.6 in the 2000s. Two, economies became healthier as governments shrank budget deficits, trimmed foreign debt, and brought down inflation. Since 2000, African countries have cut their combined foreign debt from 82% of GDP to 59% and reduced budget deficits from 4.6% of GDP to 1.8%, which sent inflation rates tumbling from 22% to 8%.

Three, several governments adopted market-friendly policies. They privatized state-owned enterprises, reduced trade barriers, cut corporate taxes, and strengthened regulatory and legal systems. Nigeria, for example, privatized more than 116 enterprises between 1999 and 2006; Morocco and Egypt struck free-trade agreements with their main export partners; and Rwanda established courts to settle business disputes. These and other steps helped local companies invest more, achieve greater economies of scale, and become more competitive.

Africa will continue to profit from the rising global demand for oil, natural gas, minerals, food, and other natural resources. The continent has an abundance of riches, including 10% of the world’s oil reserves, 40% of its gold ore, and 80% to 90% of its deposits of chromium and platinum group metals. To exploit them, African governments are forging new types of partnerships in which buyers from countries such as China and India provide up-front payments, invest in infrastructure, and share management skills and technology.

Long-term growth will get a boost from Africa’s demographic and social trends. The population is young, growing, and migrating to the metropolitan centers. In 1980, 28% of Africans lived in cities; today 40% do—a proportion close to China’s and larger than India’s. Workers in cities earn higher pay than those in rural areas and can afford to buy products and services beyond the necessities of food and shelter. That expands demand, which leads to a virtuous cycle of growth and job creation.

Many people picture Africans as subsistence farmers, but there’s a sizable middle class on the continent. By 2008, 16 million African households had incomes above $20,000 a year—a level that enabled them to buy houses, cars, appliances, and branded products. Another 27 million households earned $10,000 to $20,000. In addition, 41 million households reported incomes of $5,000 to $10,000—the level at which families start spending more than half their income on nonfood items. By 2020 the total number of households in all three segments will reach 128 million, which should make Africa one of the fastest-growing consumer markets of this decade.

Categorizing the Opportunities

Corporations must start developing their strategies by recognizing that Africa isn’t one economy. It’s home to 50-plus nations, each with its own policies and attitudes toward multinational companies, as well as its own languages, currency, and traditions. Successful companies use filters to decide which countries to enter and tailor their entry strategies to specific sectors. They focus their efforts on key markets, but those that think broadly benefit from greater scale and diversified risks.

Economists usually group countries by income level or geography, but we organized them according to their economic diversification and level of exports. As economies develop, agriculture and natural resources account for a smaller and smaller share of GDP, while the share of manufacturing and services grows. That boosts per capita income, with a 15% increase in manufacturing and services as a share of GDP usually resulting in a doubling of per capita income. Exports are the means by which emerging economies earn hard currency to pay for imports of capital goods. In most African countries, capital goods imports account for roughly half of investment, making exports a critical enabler of growth.

Readying for Takeoff

Africa’s growth accelerated rapidly after 2000 and continued even during the global recession.

Since 2000, the continent has been the world’s third-fastest growing region, outpacing Eastern Europe and Latin America.

Classified by these two parameters, which together provide a snapshot of how developed markets are, African countries fall into four broad clusters. (See the exhibit “Four Types of Economies.”) This framework can guide executives as they assess which markets to enter and how.

Four Types of Economies

Africa’s 50-plus nations are at different stages of development, as their widely varying levels of exports and economic diversification reveal. They fall into four main categories: oil exporters, diversified economies, transition economies, and pretransition economies.

The diversified economies.

Africa’s four most advanced economies—Egypt, Morocco, South Africa, and Tunisia—have well-developed manufacturing and service industries. They have relatively high per capita incomes and more stable GDP growth than most of the other economies, despite the political risks that have come to the fore in North Africa. Services, such as banking, telecom, and retailing, have accounted for more than 70% of GDP growth in these countries over the past decade.

These countries are also Africa’s largest consumer markets; 90% of households there have some discretionary income. That makes them ideal places for consumer-facing businesses to anchor their operations. Walmart, for example, recently struck a $2.4 billion deal to pick up a 51% stake in one of South Africa’s largest retailers, Massmart, which has stores in 13 other African countries.

However, these economies have higher labor costs than China or India and struggle to compete even in low-value manufacturing industries. They need to expand exports, improve education to create a skilled workforce, and build infrastructure.

The oil exporters.

Africa’s oil and gas exporters have the continent’s highest per capita incomes but are the least diversified economies. Three of the largest—Algeria, Angola, and Nigeria—have already attracted the world’s petroleum majors and have rapidly growing consumer markets. In Angola, for instance, retail banking is expected to grow by 6.8% a year through 2020, telecommunication services by 5.2% a year, and nonfood consumer goods by 4.4% a year. Because of their income levels, the oil exporters are attractive markets for high-end goods and services.

Africa’s oil exporters face the same challenges as many resource-rich nations: maintaining political stability; resisting the temptation to overinvest, which would make them vulnerable if commodity prices decline; and creating a diversified economy. Nigeria has already begun the transition to a diversified economy. While resources have accounted for 35% of the country’s GDP growth since 2000, services have accounted for 37%. The number of telecommunications subscribers there increased from practically zero in 2000 to 63 million by 2008, and banking assets grew fivefold.

The transition economies.

Africa’s transition economies—such as Ghana, Kenya, Uganda, and Senegal—have lower per capita incomes than the countries in the first two groups but are growing rapidly. Though their agriculture and resource sectors together account for as much as 35% of GDP and two-thirds of exports, these countries increasingly export manufactured goods to other African countries. The penetration of banking, telecom, and modern retailing is much lower than it is in the diversified economies, but that offers attractive opportunities.

Companies targeting these markets must tailor products to poorer customers. Still, early entrants will find less competition here, and the rapid growth is expected to continue. Several transition economies are likely to increase their commodity exports in the coming years, which could turbocharge growth. In Ghana and Uganda, for instance, recent oil discoveries will boost tax revenues, making it easier for them to diversify their economies.

The pretransition economies.

These economies are poor, with annual per capita GDP of just $353 on average. But some of them are expanding rapidly. The three largest—the Democratic Republic of the Congo, Ethiopia, and Mali—have grown, on average, 7% a year since 2000. However, their growth has been erratic in the past.

The economies of the Democratic Republic of the Congo, Ethiopia, and Mali have grown 7% a year since 2000.

These pretransition economies differ greatly, but all of them lack the basics, such as stable governments, strong public institutions, and sustainable agricultural development. Multinational companies must track these economies, but only those that can handle the risks should enter them.

Four Keys to Success

Winning in Africa requires executives to understand the business environment in each country they enter and to tailor their plans accordingly. It demands innovation; the winners are often companies that tackle complex challenges creatively. In our work, we have found four other elements critical to success in Africa.

1. Pick the right entry strategy.

Once a company has identified the countries and industries in which it would like to have a presence, it must choose an approach. Should it start from scratch and grow on its own? Should it build a presence by acquiring small local players? Should it take a stake in a Pan-African player?

The answer will depend on the industry. In relatively well developed sectors such as retail banking and telecom, it’s probably too late to deploy only an organic strategy using traditional business models. African banks, such as Ecobank and Standard Bank, as well as foreign banks like Standard Chartered and Barclays, have already spent decades establishing operations in many countries. More recently, some have grown their footprints by buying up local banks.

New entrants will increasingly have to use M&A as an entry strategy. One option is to knit together a Pan-African operation by acquiring regional players. Another is to buy a stake in a big African company. That’s what China’s ICBC did, purchasing 20% of Standard Bank in 2008. The alliance gave ICBC immediate access to the 17 African countries in which Standard Bank operates and enabled it to finance the activities of Chinese companies all over Africa.

Organic growth strategies are possible in sectors such as retailing. Formal retailing is limited in most African countries, and that allows global players to move in. Zara, the Spanish retailer, has opened 12 stores across North Africa in the past five years. Shoprite had just one store outside its home country of South Africa in 1995 but has since become the continent’s largest food retailer, opening 71 stores in other African nations. Organic growth is also possible in industries where disruptive technologies create new products and services. Consider Safaricom’s mobile-phone-based money-transfer service, M-Pesa, which enables customers to deposit and withdraw money from a network of agents. Launched in Kenya in 2007, M-Pesa captured 6.5 million customers in just two years’ time, and it has since been launched in Tanzania and South Africa as well.

2. Get—and get to—customers.

Consumer preferences vary enormously across Africa, so companies must invest in market intelligence. Brand-conscious consumers will save up to buy premium items, but most people have low incomes and lack access to credit. Using imaginative strategies—selling products in small quantities; offering credit, hire purchase, and layaway plans; and educating consumers—is essential. Developing innovative, low-priced consumer products and services is often critical. For example, Nokia focuses on phone models priced from $20 to $50 and adjusts profit targets to reflect the lower prices instead of adopting a global benchmark.

Surging Consumer Demand

By 2020, more than half of Africa’s 244 million households will have annual incomes of more than $5,000, suggesting that they will enjoy discretionary spending power.

Reaching customers is arguably as tough as understanding their needs. Africa’s infrastructure is poor, and more sales occur through informal channels, such as vendors and family-run businesses, than through stores and malls. Companies can overcome these challenges only by being flexible. Some foreign companies have a single national distributor; others over half a dozen. But all find they need more people to manage distributors in Africa than they do elsewhere. In Nigeria, P&G appointed exclusive distributors for seven geographic areas and hired employees to support each one, which it doesn’t do in any other country. You must be patient—building a logistics network in Africa takes time. P&G spent 10 years building its Nigerian network.

Multinationals can hasten the expansion of formal retailing channels by co-investing in mall development or selling through multibrand stores. One successful European retailer has become a mall developer in Africa, which ensures strategic locations for its stores as well as anchor tenants for its malls. Shoprite is taking a similar tack as it expands across the continent.

In many African countries informal retail channels account for more than 80% of retail sales. Companies must find innovative ways to work with them. Coke has created a network of micro distribution centers to reach informal retailers in both rural and urban areas. It comprises 2,800 small businesses that use bicycles and manual pushcarts to deliver products over unpaved roads.

Infrastructure gaps demand creative solutions from service providers, too. For example, to ensure that it has continuous electrical power, Africa’s largest cellular services operator, MTN, has built generators into each of its 5,000-plus towers in Nigeria. It uses a fleet of trucks to feed them diesel. By providing better service, MTN has acquired 31 million subscribers and built a $4.5 billion business in the country. Despite the added costs, its profit margins in Nigeria are routinely above 50%.

3. Fill the skills gap.

High-skilled workers in Africa are similar to those in other emerging economies. The best-educated attend top universities, often overseas. Each year 200,000 students from sub-Saharan Africa study abroad. At the other end of the spectrum, there’s also little difference between Africans and workers from other developing economies. One study found that factory workers in Kenya are as productive as those in China and India, but the overall production costs in Kenya are higher because of poor regulation and infrastructure—problems that are likely to go away.

What’s missing is a cadre of midlevel managers—a shortage that reflects the weaknesses in Africa’s secondary and tertiary education systems. To fill the gaps as their operations grow, multinational companies use several strategies:

Bringing in midlevel expatriates.

Particularly in the early years, foreign companies import managers to start operations and groom local talent. Successful organizations create clear expectations about talent development; draw up targets; and monitor progress. One multinational company has reinforced its middle management in Nigeria with expatriate managers from other emerging markets, such as India, who have the skills and experience needed to deal with the Nigerian environment.

Setting up extensive training programs.

Multinationals usually find that employees at all levels in Africa need training. Some invest in the local education system to develop people with the skills they require. Such programs may also help them win support from governments; companies can leverage them to obtain permits to enter markets, get tax credits, or gain access to land and other resources. A major oil company in Angola has created a program to train 14- to 16-year-olds as upstream specialists. It also works with a local university to increase the number of engineers and scientists graduating every year and funds a law program in oil and gas that produced its first class, of 28 graduates, in 2008.

Insisting on global rotations.

Other corporations rotate senior executives and emerging leaders recruited in Africa through positions abroad so that they can bring home an array of skills to share. A case in point is the financial services firm Old Mutual, which maintains a constant flow of talent between its offices in Africa and those overseas.

Buying talent.

Entry strategies that rely on M&A have one key advantage: the talent that comes with acquisitions. Mobile Telecommunications Company, for example, inherited a slew of senior and midlevel executives when it bought Celtel, then Africa’s leading mobile player, six years ago.

4. Manage risks.

Political instability is one of the two biggest risks foreign companies face on the continent, as the world is witnessing in North Africa. The other is adverse actions by governments, such as reneging on contracts or passing legislation that hampers operations—which some resource companies have experienced in West Africa. Abrupt changes in import tariffs and quotas can also affect operations.

Diversifying across geographic markets mitigates these risks. In addition, companies can create coalitions of stakeholders that help them detect potential problems early so that they can head them off or draw up contingency plans. Companies can do this in three ways:

Building partnerships.

Local businesspeople and politicians usually know the political landscape and learn of changes long before they hit the news. Such partners can help foreign companies navigate bureaucracies and foster relationships with official and unofficial powers.

Wooing the influentials.

Smart companies identify key influencers, such as congressional representatives, regulators, and mayors, in each country. They take the time to figure out, say, who among the top 50 influencers are their strong supporters; who’s indifferent but can be turned into a supporter; and who’ll never support them. They actively cultivate the first two groups.

Putting key stakeholders on their boards.

Inviting key public and private sector stakeholders to join a country board aligns their incentives with the company’s. It gives the locals a stake in the company’s success.

In many ways Africa holds the same potential that China did 20 years ago. A large rural population is moving to the cities, landing jobs with higher incomes, and starting to enjoy discretionary spending. Demand is growing, and foreign direct investment has soared: from $9.4 billion in 2000 to $46.4 billion in 2009. Just as investing in China embodies some political risk, so too does doing business in Africa. Companies must think carefully about the approaches they adopt, but it will be worthwhile. Above all, first movers will have the opportunity to forge strong local partnerships and capture market share before everyone wakes up to the buzz around the Bright Continent.

A version of this article appeared in the May 2011 issue of Harvard Business Review.

Mutsa Chironga is a consultant in Johannesburg,

Acha Leke is a senior partner in Lagos, and

Arend van Wamelen is a partner in Johannesburg at McKinsey & Company.

Susan Lund is a research director of the McKinsey Global Institute, based in Washington, DC.

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